The business made up the vast majority of its $1.8 billion in revenue last year as consumers rented DVDs, Blu-ray Discs and video games (launched in June) from more than 35,000 of its bold-red kiosks around the U.S.

Not bad for what was a development concept within McDonald's Ventures when Coinstar made its first investment in late 2005. It acquired 100% interest in early 2009.

The business made up the vast majority of its $1.8 billion in revenue last year as consumers rented DVDs, Blu-ray Discs and video games (launched in June) from more than 35,000 of its bold-red kiosks around the U.S.

Not bad for what was a development concept within McDonald's Ventures when Coinstar made its first investment in late 2005. It acquired 100% interest in early 2009.

Coinstar plans to make its DVD rental business even bigger. It recently agreed to pay $100 million for NCR Corp.'s (NCR) DVD assets.

NCR wants to get rid of 10,000 Blockbuster-branded kiosks to focus on other core businesses. Analysts expect 5,000 of the better-performing ones to join the Redbox network, pending antitrust approval.

Redbox Kiosks

Wedbush Securities estimates Redbox will generate an incremental $200 million in revenue and $1 per share annually from 5,000 Blockbuster kiosks remade into Redbox versions.

But with the rise of video streaming and concerns over the future of physical DVD rentals, Coinstar has been under pressure to do something about its next act.

In February, Coinstar announced a joint venture with Verizon (VZ) to offer "the best of both worlds" in video entertainment — "physical and digital."

The service is expected to roll out in the second half of this year and compete with Netflix's (NFLX) streaming and DVD rental offerings.

"Anybody who has a broadband connection, whether mobile or at home, can sign up and utilize Redbox streaming," Di Valerio said.

Subscribers to the joint venture will also be entitled to a certain number of new-release DVDs at kiosks on a monthly basis, he says.

In contrast, Netflix subscribers must pay for two separate subscriptions to get physical DVDs via mail and streaming content over the Internet.

Concern over the fall of DVDs may be premature, some say.

"My personal feeling is that we're still some years away," said Larry Berlin, an analyst with First Analysis Securities.

That's certainly the view of Coinstar. Said Di Valerio: "We believe the tail on the physical space is quite long" even after streaming overtakes DVDs, which he figures will be in three to four years.

Coinstar isn't waiting around for the end. It's been testing new kiosk ventures to take up the slack.

At least six concepts are being seriously tested.

A top contender, a coffee kiosk that brews Seattle's Best Coffee, is expected to start rolling out later this year, selling regular cups for $1 and specialty blends and hot chocolate for $1.50.

Other kiosk tests under way include "ecoATMs," which recycle and monetize used electronic devices and "Gizmo," the code name for a concept that sells refurbished electronic devices such as game consoles and digital cameras.

Then there is "Star Studio," a reimagined photo booth with lots of bells and whistles; and "SoloHealth," a kiosk that can take your blood pressure, read your body mass and check your eyesight, all while displaying ads.

"We're really focused on addressing the self-service automated retail market," Di Valerio said. That market in the U.S. is expected to grow from $740 billion in 2010 to more than $1.1 trillion in 2015, according to the IHL Group.

"(Coinstar) is trying to figure out what they are going to look like a few years from now and that's a lot of work," said Berlin.

Some analysts are more worried than others over how Coinstar will adjust to the shift from DVDs to video streaming.

Coinstar and Verizon will need to spend "lots of money on content" to make the venture work, said one analyst who did not want to be identified with negative commentary on Coinstar.

It will be hard to compete with Netflix on content, some observers say. Netflix reportedly will be streaming fairly new movie releases such as "The Artist" and adding original programming.

As it stands now, Verizon has a 65% stake in the joint venture to Coinstar's 35%. Operational details are still sketchy.

Most observers, including Coinstar executives, agree that competition in video streaming is heating up as more companies enter the market, including Amazon (AMZN).

For now, DVD rentals are still showing significant growth with Coinstar's Redbox leading the way, says Eric Wold, an analyst with B. Riley & Co.

"Why go to kiosks?" asked Wold. "It's convenience. Kiosks are in supermarkets, gas stations, convenience stores, everywhere. You don't have to make a separate trip.

"Secondly, they are less expensive."

Netflix Prices

Redbox enjoyed a spurt of new business starting last fall after Netflix raised prices.

Wedbush Securities estimates that more than 11 million Netflix hybrid subscribers quit or switched to a streaming-only or DVD-only plan in the second half of 2011, creating an opportunity for Redbox.

In the fourth quarter, Redbox revenue jumped 39.5% over the prior year to $445.5 million, driven by new kiosks, strong demand for new-release DVDs and consumer acceptance of a 20% price hike on DVD rentals, from $1 to $1.20 a day.

Coin revenue grew 4.8% to $74.4 million. Coinstar collects a fee from customers who exchange their coin vouchers for cash. Those who exchange vouchers for gift cards or e-rewards with retail partners get full value.

Despite coin's slower growth, Wold still sees it as a "great business" since it has "no competition, and nice margins and cash flow."

"There's no reason to get rid of it," he said.

Overall company profit in the quarter jumped 47% to $1 a share and 78% for the full year.

Analysts polled by Thomson Reuters estimate first-quarter profit will rise 91% vs. last year to 88 cents a share.

But profit growth is expected to slow for the rest of the year due to startup expenses for the Verizon joint venture, investments in new ventures and expansion into Canada.

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